BUNK 39
CONSUMERS ARE KING
Since the dawn of time after every recession folks have complained the economy can’t recover because consumers are too tapped out and won’t spend again. And because consumer spending is such a big part of our economy, if they don’t spend, we’re doomed! Eek! As I write in 2010 there are endless proclamations of US consumers’ demise. And though we get the same stories after every recession, pundits treat it like this is the first time they ever dreamed up this notion—and they never learn that the notion is flawed and wrong.
(Interestingly, the flip side is folks often complain US consumers are dangerously profligate and spend too much, and that will doom the economy. So, we’re doomed when people spend, and doomed when they don’t spend? Can’t have it both ways! Few folks think through how silly and contradictory these fears are.)
It’s true—consumer spending is a whopping 71 percent of US GDP.1 Clearly, if such a big part falls far and fails to recover, that can hurt for a long, long time. Except consumer spending typically doesn’t fall much in recessions—vastly less than commonly imagined. It’s two other parts of the economy, business investment and net exports, that, though smaller, are much more volatile and almost always contribute most to an economic decline and recovery—and did this last time around—although it was little noted in the media.
Figure 39.1 Contributors to US GDP Decline Q2 2008 to Q2 2009—Consumption Isn’t the Driver
Source: Bureau of Economic Analysis, percentage point contributions to peak-to-trough decline in US GDP (Q2 2008 to Q2 2009).
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The Big Decline Wasn’t Consumers

Consumer spending doesn’t fall that much? Blasphemy! Except it’s true. Figure 39.1 shows how much different economic components contributed to the 2007-2009 recession—from when GDP peaked to the trough. (NBER dated the recession’s start as December 2007, but GDP didn’t peak until Q2 2008 and bottomed in Q2 2009.) Falling imports actually added 3.0 percent to GDP. (It’s the squirrelly way we account for GDP—net exports, or exports minus imports. When imports fall relative to exports they can actually add to GDP, even though falling imports is often a sign of a soft economy. See Bunk 48.) Government spending added too—0.5 percent. No big surprise—pretty much everyone knows the government spent more. Residential investment detracted 0.8 percent. (That the decline was relatively so small likely surprises a lot of folks based on what they’ve read in the papers about the housing implosion.) Exports detracted 1.9 percent, and business investment a big 3.4 percent—by far the biggest drag. By contrast, personal consumption detracted a mere 1.2 percent—not insignificant, but just one small part of the overall decline.
Figure 39.2 Private Consumption as a Percentage of US GDP—Jumps in Recession
Source: Thomson Reuters, Bureau of Economic Analysis.
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This isn’t unusual. Consumer spending normally isn’t as volatile as people think. In fact, consumer spending as a percentage of GDP typically grows during recessions—and did this last time—by record amounts. That seems counterintuitive but isn’t. If the overall economy falls, and consumer spending falls too but not as much, then it increases relatively. Figure 39.2 shows private consumption as a percentage of GDP through time. Over time, it’s been growing, but most notably jumped in the last five recessions. That couldn’t happen if consumer spending were as volatile as, say, business investment.

Consumer Spending Is Stable

How can consumer spending be so stable? Simple—think about what we buy. Many may think “spending” and immediately think “cars, dinners out, vacations, jewelry, V-V-V-Viva Las Vegas.” But most of what we buy is boring and unsexy—toothpaste, medicine, gas for the car, tax preparation services. Exciting stuff. When times are tough, we economize—making our cars and TVs last another few years. We put off trips or maybe go camping instead of a cruise. But we still do most of what we did and spend most of what we spent. We might switch to a cheaper brand for the necessities and drive less—but we still spend on necessities.
Table 39.1 shows how big each component of personal consumption was at the GDP trough, and how much each fell. Note: We spend most (68.1 percent) on services, yet services spending shrank just 0.2 percent. Spending increased on the three biggest services components: housing and utilities, health care, and “other services”—which is a catchall for everything not easily categorized with the other components, such as legal services, Internet, school tuition, even haircuts and dry cleaning.
Table 39.1 Components of Private Consumption—Services Are Huge and Stable
Source: Bureau of Economic Analysis; percent of consumption based on Q2 2009 GDP “Third Estimate” nominal values.
Percent of Consumption (Q2 2009) Real Growth Q3 2008 to Q2 2009
Gross Domestic Product-3.8%
Personal Consumption Expenditures100% -1.7%
Durable goods 10.1% -8.8%
Motor vehicles and parts3.0%-15.3%
Furnishings and durable household equipment2.5%-10.0%
Recreational goods and vehicles3.2%-2.9%
Other durable goods1.4%-4.9%
Nondurable goods 21.8% -2.7%
Food and beverages purchased for off- premises consumption7.9%-2.2%
Clothing and footwear3.2%-7.6%
Gasoline and other energy goods2.8%1.4%
Other nondurable goods8.0%-2.6%
Services68.1%-0.2%
Household consumption expenditures (for services) 65.5% -0.2%
Housing and utilities18.7%0.3%
Health care16.2%2.1%
Transportation services3.0%-4.8%
Recreation services3.8%-1.7%
Food services and accommodations6.1%-3.7%
Financial services and insurance8.2%-1.0%
Other services9.4%1.1%
Final consumption expenditures of nonprofit institutions serving households 2.6% -3.9%
The next biggest chunk of consumer spending is nondurable goods—21.8 percent. Nondurables are things intended to last less than three years—like shoes, clothing, food you buy at a grocery store—not entirely but mostly the things you need rather than want. That bit fell 2.7 percent.
The smallest chunk of spending is durable goods—mostly the large-ticket items that really do suffer most in a recession among consumer goods. And they shrank most, but are just 10.1 percent of total spending! Though we spend least here, these grab the most headlines. “Auto sales were down some huge number!” Eek squared! But why does that surprise? During a recession, most people can delay buying a car. It’s not great for the auto industry, but it’s not disastrous for the economy overall—it’s too small a part.
That doesn’t stop headlines from screaming that consumers won’t come roaring back to save the economy. They’re right! Consumer spending, overall, just doesn’t fall that much in recessions, so it needn’t come roaring back to help the economy grow. But oddly, the media is usually silent on business spending, which typically falls more, then bounces big—a huge contributor to early post-recession GDP growth. As I write in 2010, a morose media complains (wrongly) consumer spending hasn’t resumed—though it has—and its lack of growth will keep the economy from growing. It won’t, on the one hand. On the other hand, the media completely misses that, since US growth resumed in Q3 2009 through Q1 2010, business investment bounced back a massive 19.2 percent.2
Are consumers important to the US economy? Of course. But they aren’t nearly as fickle as most folks fear. It’s a bunking bronco of a myth.
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